SINCE the release of the January 2025 World Economic Outlook (WEO), the global economy has entered an increasingly turbulent phase.
A wave of new tariff measures by the United States, followed by countermeasures from its trading partners, has resulted in near-universal US tariffs—bringing effective rates to levels not seen in a century. This constitutes a major negative shock to growth, compounded by the unpredictability with which these measures have been announced and implemented. The volatility has complicated economic forecasting, forcing the IMF to issue a “reference forecast” based on information available as of April 4, 2025.
Under this forecast, global growth is projected to slow to 2.8 percent in 2025 and 3 percent in 2026, significantly below the January projections of 3.3 percent for both years and far below the historical average of 3.7 percent. Growth in advanced economies is expected at just 1.4 percent, while US growth is forecast to decline to 1.8 percent—nearly a full percentage point lower than earlier projections. Trade tensions, policy uncertainty and weaker demand momentum all weigh heavily on the outlook. The escalating trade war risks constraining both short- and long-term prospects, while shrinking international cooperation undermines progress toward resilience.
Fresh challenges are amplifying these pressures in 2025. Intensified geopolitical conflicts, persistent inflation, debt distress and accelerating geo-economic fragmentation dominate the global landscape. Wars in Eastern Europe and the Middle East threaten the flow of food and energy, fuelling inflation and unsettling markets. Disruptions to vital shipping lanes, such as in the Red Sea, have further raised costs and strained supply chains. Rivalries among major powers, particularly the United States and China, continue to drive protectionist measures, pushing economies toward inefficient production and higher consumer prices. Geopolitical risks have dampened Foreign Direct Investment, particularly in emerging markets, while “friend-shoring” and “near-shoring” are redrawing trade and investment patterns.
Although headline inflation has eased in many regions, core inflation—especially in services—remains sticky. Elevated tariffs, climate shocks and heavy government spending risk keeping prices high. Major central banks are expected to maintain interest rates “higher for longer” to contain inflation, but this raises debt servicing costs for governments and private borrowers alike. Developing economies, many already burdened with high debt, face acute fiscal stress that limits their capacity for long-term investment and development. This marks the first half of the 2020s as the weakest five-year stretch for growth in three decades. Climate change further compounds vulnerabilities. Extreme weather events and natural disasters are disrupting economies, disproportionately hurting lower-income countries. Meanwhile, the transition to clean energy is creating new strains in resource supply chains. Technological change, led by artificial intelligence, offers potential productivity gains but also raises risks of inequality, cyber threats and misallocated investment. Perhaps most alarming is the widening economic divergence between advanced and developing economies. Sluggish growth in poorer nations, exacerbated by the pandemic’s legacy, has stalled progress in narrowing income disparities, fuelling deeper social challenges.
According to the IMF, after years of shocks, the global economy appeared to stabilize, but at fragile and disappointing levels. With tariffs at century highs, inflation stubborn and uncertainties mounting, forecasts have been revised downward again. The world economy, riding a roller coaster of shocks and setbacks, is unlikely to find firm footing soon. It may take another three to four years before genuine stability and sustainable growth re-emerge. Though persistent inflation and debt and headline inflation has eased in many parts of the world, core inflation persists, particularly in the services sector. A combination of high trade tariffs, climate shocks and elevated government spending could cause price pressures to remain stubbornly high in 2025. Major central banks are expected to keep interest rates “higher for longer” to control inflation, which raises debt servicing costs for both governments and private borrowers. The end of the low-interest-rate era has put immense fiscal strain on developing economies, many of which are saddled with high levels of debt. This financial stress limits their ability to invest in long-term development. International organizations project that global growth will remain below its pre-pandemic average in 2025 and 2026. This marks the first half of the 2020s as the weakest half-decade for growth in at least last 30 years.
Extreme weather events and natural disasters are becoming more frequent and costly, disrupting economic activity and disproportionately affecting vulnerable countries. Resource scarcity related to the energy transition also poses risks to global supply chains. The rapid pace of technological change, including the rise of artificial intelligence, presents both opportunities and risks. While technology could boost productivity, it also exacerbates inequality, creates cyber security risks and could lead to significant capital mis-allocation if not managed correctly. Perhaps the most significant challenge the global economy is facing currently is the economic divergence between advanced and developing economies which is expanding. Slower growth in lower-income countries has stalled efforts to close global disparities, a problem worsened by the pandemic. The resultant disparity in income, has further escalated the gap between rich and poor, thus creating more problems in social sector.
However, a recent I.M.F report says that after enduring a prolonged and unprecedented series of shocks, the global economy appeared to have stabilized, with steady yet underwhelming growth rates. However, the landscape has changed as governments around the world reorder policy priorities and uncertainties have climbed to new highs. Forecasts for global growth have been revised markedly down compared with the January 2025 World Economic Outlook (WEO) Update, reflecting effective tariff rates at levels not seen in a century and a highly unpredictable environment. Global headline inflation is expected to decline at a slightly slower pace than what was expected in January. Bottom line- Global economy is riding a roller coaster and ups and downs will perhaps continue for some time but it might take three to four years before we see light at the end of tunnel.
—The writer is Former Civil Servant and Consultant (ILO) & International Organisation for Migration and author of seven books.
